November 13, 2012

Detroit Free Press Staff Writer

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Detroit's financial condition is deteriorating more quickly than projected, and without an infusion of money from the state, the city could run out of cash by mid-December, a top city official told the board that has significant oversight of the city's finances.

But William (Kriss) Andrews, the program management director overseeing Detroit's massive overhaul of city government under a financial stability agreement with the state, backed away from warnings that the city would be broke by next month.

He said he believes the city will meet crucial benchmarks the state is requiring before it will release money from bond sales -- $10 million this month and $20 million in December -- that will keep the city solvent in the short term.

But the city's long-term fiscal health is less certain. Andrews, speaking Monday before the joint city-state Financial Advisory Board, said the city's tax revenues did not come in as high as he had anticipated last month, dropping by $18 million. That and other new figures he outlined painted a dire and worsening picture as Detroit struggles to turn around enormous deficits and long-term debt.

Without the money from bond sales, Detroit would be $3 million to $5 million in the red by mid-December, possibly triggering furloughs, payless paydays or other drastic steps for city employees. And by June 30, the end of the city's current fiscal year, Detroit would be short by nearly $47 million in cash to pay its bills.

The city's cash-flow crisis is "more challenging than it's ever been and more challenged than we reported last month," Andrews said, adding that the city will need to find new revenue sources, a difficult proposition even in good times.

"The cash position for the city is more critical than it was a month ago," Andrews said. "We've got to deal with this problem."

Andrews spoke at the monthly meeting of the advisory board, the panel's first meeting since Michigan voters repealed the state's emergency manager law, Public Act 4, a week ago.

The repeal gutted the state's toughest methods for forcing changes on troubled cities and school districts: Public Act 4 gave state emergency managers the power to strip control from local elected officials and toss out union contracts for government workers.

The city and state sold $137 million in bonds to refinance debts and restructure government, but the state is holding in escrow about $80 million of that money. The city won't get the funds unless it meets certain benchmarks.

Crucial to meeting those targets in the next couple of weeks will be two decisions by the Detroit City Council. The state wants the council to approve new contracts for the accounting firm Ernst & Young for fiscal analysis and for the law firm Miller Canfield for legal advice for Mayor Dave Bing's administration on consent-agreement issues.

Bing's hiring of Miller Canfield has been a hugely contentious issue for months for the council because of the firm's role in writing the state's emergency manager law and advising Bing as the state gave city officials a bitter ultimatum: Accept a fiscal stability agreement that preserved city officials' jobs but gave the state major oversight of city finances, or risk a state-appointed emergency manager.

Councilman Andre Spivey, who attended the meeting Monday, said he's still not sold on the Miller Canfield contract.

"That's a bone of contention for most of my colleagues and myself," Spivey said. "I think it's going to be a close vote."

Advisory board member Ken Whipple said he believes the council will do what's necessary to keep the city from running out of cash, despite losing $18 million in revenue from its financial forecasts.

Still, "they can't do that more than a couple of times or they're in real trouble," Whipple said.

"On the other hand, I think finally, they've got the right milestones in place, and I'm seeing some action taken," he said.

He added: "Everybody has the same realization: that we are in deep trouble, and we're going to run out of money unless we get those milestones in place right now."

Monday also provided little additional clarity on what will happen with Detroit's consent agreement in the aftermath of the emergency manager law repeal.

Gov. Rick Snyder and Michigan Attorney General Bill Schuette said the state's previous emergency financial manager law, Public Act 72, went into effect when Public Act 4 was suspended this fall pending the referendum. They said Detroit's financial stability agreement stays largely intact because it was based mostly on the previous law or others not related to Public Act 4.

But unions and others disagree, saying the consent agreement should be tossed out because Michigan has no state emergency manager law because voters rejected Public Act 4, which rescinded the earlier law.

That dispute is almost certain to be decided by the courts.

Advisory board Chairwoman Sandy Pierce said that, despite the repeal, both the financial stability agreement and the role of the advisory board remain intact. But, she said, the city may no longer impose new contracts or employment terms, or reject collective bargaining agreements, unilaterally.

Pierce said the primary foundation of the consent agreement was a state law on intergovernmental agreements, "thus the repeal of Public Act 4 does not invalidate the financial stability agreement or the Financial Advisory Board."

The advisory board first sounded the alarm about an exacerbated cash-flow crisis in October, warning Bing administration officials that reforms are not happening fast enough. Bing and his top aides have conceded that the pace has been too slow but cautioned that the city will soon begin realizing significant savings, particularly from pay cuts and reduced pension and health benefits that Bing imposed on city workers, including police and firefighters.

Council members have asked the city's Law Department for a legal opinion on how the city should proceed with the agreement in the aftermath of the repeal. But council members already are talking about options such as seeking to disband the Financial Advisory Board or at least eliminate its pay -- the city and state split $25,000 annual salaries for each of the nine board members and their work-related expenses.

Council President Pro Tem Gary Brown said the city's top lawyer, Krystal Crittendon, is expected to give the council an opinion as early as this week. Her opinion is likely to give council members a significant amount of direction on what they can do to reassert authority and possibly reverse some of the cuts Bing imposed.

More Details: What officials must do for funding

Detroit and the state negotiated an infusion of $137 million in cash from bond sales — backed by the state — this spring to help the city restructure itself.

Detroit has received about $35?million so far, but much of the remainder won’t be released unless state Treasurer Andy Dillon agrees the city is meeting crucial benchmarks:

• To receive $10 million next Tuesday, the Detroit City Council must approve a one-year renewal of a contract with accounting firm Ernst & Young for financial analysis and a contract with the Miller Canfield law firm, which is advising the Bing administration on matters related to the city’s financial stability agreement with the state.

The city also must improve operations in the city’s law, transportation, lighting, fire and police departments and in its income tax collections.

• To receive $20 million Dec. 14, the city must show additional progress in areas including its property assessing and property tax functions, improve its cashiering operations, hire a firm to help the city restructure, hire a firm to combat fraud in worker compensation and boost efforts to outsource payroll operations.

The rest of the money will be released as the city meets those and other goals for restructuring and reform.